The limits of direct investment in ag

Understanding partnerships such as the one between Goldcrest Farm Trust and the Ontario Teachers’ Pension Plan is an increasingly important element in assessing US and global agriculture markets.

As Goldcrest Farm Trust Advisors sets out to deploy the $300 million fund it raised on behalf of the Goldcrest Farm Trust REIT earlier this month, the asset manager’s close relationship with Ontario Teacher’s Pension Plan is worth a closer look.

The relationship the pair enjoys demonstrates, to some extent, an important feature of how global farmland markets currently operate.

OTPP anchored Goldcrest’s most recent fund, as well as its $300 million 2015 predecessor. While Goldcrest Farm Trust Advisors partner and co-founder Edward Hargroves declined to discuss the terms or disclose the size of the commitment, he did describe other investors in the fund as relatively minor in comparison.

Most importantly, he described Goldcrest as functioning effectively as the Canadian pension’s “arm” for US row crops.

“We aren’t stepping on anyone’s toes. When they do a direct deal in apples, we’re not focused on that space at all,” Hargroves explained. “They [OTPP] are sophisticated guys who have many billions of dollars in farmland across the world and they get the long-term picture and believe that having this asset in the US, the trophy ag capital of the world, is important.”

In addition to the benefits of working with an institution already involved with agriculture, Hargroves said investments from OTPP mean Goldcrest doesn’t have to worry about raising additional capital. He also highlighted the long-term certainty that comes with investing for Canadian pensions facing fewer liability challenges than their US counterparts.

“A lot of these guys [Canadian pensions] are still building their war chests and they have money coming in and they are not paying out just yet,” Hargroves said. “If they are, it’s a smaller level vis-a-vis some of the pension funds that we see here in the US that are meaningfully underwater.”

PSP Investments, also reportedly an investor in Goldcrest’s second fund, declined to comment.

Asked to speculate on what might make OTPP, which focuses on direct investments in other areas of its ag portfolio, willing to commit to a closed-end fund like Goldcrest’s, Hargroves stressed the local networks necessary to build a portfolio of US farmland. He also highlighted the price premium often placed on aggregated farmland portfolios and teams that have proven ability to pull them together.

For firms already more likely to see OTPP as a potential competitor for deals than a realistic prospective LP in their funds, their hand-in-glove relationship with Goldcrest demonstrates the type of partnership that increasingly characterizes how US markets have evolved.

Just as Hargroves is wise to look past fellow managers to the prospects of the capital they invest when gauging his relative position, savvy managers will come to their own conclusions about OTPP and the durability of the partnerships it, and institutions like it, establish as they expand their agricultural exposures.

While there is little reason to doubt such institutions’ long-term intentions in ag for reasons of capacity or scale, the scope and geographic diversity of some such efforts within a sector priding itself on the need for specialization has inspired some skepticism.

It is worth noting that Hargroves’ own career saw him work with Goldman Sachs to assemble a portfolio of US farmland, which was eventually sold to CPPIB in 2013. Those assets were collected within a REIT called AgCoA, with its row crop assets subsequently sold to entities related to Bill Gates. Elements of AgCoA’s management team are now some of Goldcrest’s senior executives.

This demonstrates that personnel changes and re-assessment of long-term trends do happen within large institutions, and nothing is set in stone.

That OTPP still finds it cost effective to rely on distinct funds managed by outside firms to tap fragmented markets hints at the current limits to what the “Canadian model” can realistically accomplish within ag.

It remains to be seen whether and how those limits will change for OTPP in the years to come.